Budget Dreams and Dangers of Facebook's IPO

The smart estimate: an eventual budget bump of a "few hundred million dollars." (Photo: Getty/Ryan Anson)

In the world of state budget writing, the past is often prologue. And that's why news of a tech company's dazzling initial public offering is nothing new in Sacramento, and why there's both hope... and caution.

And the bottom line: the eventual capital gains from the 2012 Facebook IPO will no doubt help balance the state's books. But the smart bet is that it won't be enough to stave off the vast majority of the tough choices that lie ahead.
Wednesday's IPO announcement by the Menlo Park company is the jumping off point of my budget story on this morning's edition of The California Report -- specifically, the impact on state finances.

The easy assumption to make is that Facebook will be, for the budget, better than Google was in 2006. After all, news reports say that the search engine giant's 2004 initial public offering will be dwarfed by the king of social media. So that would mean the state's finances are in store for some great times?

Well, not so fast.

The news, as we remember from the spring of 2006, was amazing: a $7 billion windfall of tax revenues, led largely by Google. The company's insiders and staffers began cashing in their IPO stocks on Valentine's Day 2005, meaning much of the state taxes they paid on capital gains showed up in the 2006 calendar year. And while the data doesn't single out Google, state tax stats show that the number of $1 million+ tax returns in California jumped an amazing 27% between 2004 and 2006.

"This is of course, great news for California," said Governor Arnold Schwarzenegger at the time, in one of his more modest statements.

But the main problem with using Google as a template for Facebook is that the rest of the California economy is either sluggishly improving or still in the doldrums -- unlike 2006.

"The stock market was doing pretty well, and the housing market was booming" in 2006, says Jason Sisney of the nonpartisan Legislative Analyst's Office. "That $7 billion was an accumulation of all of those factors, of which Google was one part, but just one part."

Sisney also points out that there are too many variables in the Facebook IPO's impact on state revenues for any safe forecast (the LAO overall revenue forecast is due out later this month). Those variables include how long the company's insiders are prohibited from selling their shares; how many of them are actually California residents; and the chances of any major changes in federal or state tax laws that provoke changes in when those shares are sold.

Tax changes like... the federal debate over keeping the Bush 2001 tax cuts or allowing them to expire... or even perhaps the November tax initiatives that seek to raise rates on high-income earners.

And then there's the complexity of how revenues would be scored. Sisney says it's possible Facebook capital gains revenues could start showing up as late as 2014, but as soon as the budget now being crafted. After all, remember that any capital gains realized by a shareholder before July 1, 2013 -- some 15 months after the earliest date for the IPO -- would be counted as revenues for the fiscal plan now under consideration.

(Keep in mind, too, that any major spreading out of the taxable income bump from Facebook will likely cause the dollars to be spread thinner by budgeting standards, with those bucks having to be counted in the tax year from which they came... a factor that also could cause other ripple effects on spending levels.)

Nonetheless, there are some important lessons from the past -- notably on the issue of how the money can/should be spent. And for that, you can actually roll the clock back beyond Google to the dot-com explosion of the late 1990s and the Capitol pressures placed for additional long-term spending with revenues that certainly looked to be a one-time fad.

"All these constituency groups that had been starved suddenly came to the table and said, 'Okay, we just elected a Democrat, let's fund these programs, that's what you're all about,'" remembers Steve Maviglio, at the time press secretary to Governor Gray Davis. "There was massive pressure."

Pressure also grew in 2006 when the Google dollars, combined with the state's healthy economy, produced a major windfall. A summer 2006 LAO report calculated the year-to-year spending increase in the budget at 9.5%:

The 2006‑07 budget sharply increases funding for education, provides targeted increases in several other program areas, and prepays nearly $3 billion in budgetary debt incurred during the 2002‑03 through 2004‑05 fiscal years. The expanded commitments included in this spending plan are in striking contrast to the four previous years, when policymakers were faced with closing major budget shortfalls.

While some of the money was indeed used for one-time expenses, there was political pressure -- in an election year, no less -- to help fill in holes left by those deficits from earlier in the decade.

And that's a pent-up feeling that will no doubt be talked about this time around, depending on when Facebook IPO capital gains show up, and at what level.

"We should use this added revenue to protect our public school students from the Governor's trigger cuts and pay down the state's debt service," said Assembly GOP leader Connie Conwayin a prepared statement on Wednesday. "Let's not repeat the mistakes of the past by using one-time funding for on-going programs."

But using the windfall on public schools -- in an amount above what schools would get on the natural from income taxes, under the Proposition 98 formulas -- might mean an artificially high funding level that continues on into the future. It remains unclear exactly what kind of regular or special school funding the GOP leadership has in mind.

Both Assembly Speaker John Perez and Governor Jerry Brown have said in separate one-on-one interviews that they believe unexpected dollars should go towards lowering what Brown has termed the state's "wall of debt." Brown also mentioned the need for a healthy rainy day fund.

But for now, this all speculation. And the speculation reflects the reality of state finances after years of deep and unpopular cuts -- a reality that, occasionally, likes to turn to fantasy about a new gold rush that helps right the ship of state in a hurry.

About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk. He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.